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Joshua Gans has an interesting post examining potential antitrust issues involving Apple, an issue we’ve discussed here and here.  Gans focuses in on the two most relevant issues:

There are two aspects that might raise antitrust concern: (i) Apple’s exclusivity-like requirement that no external payment links be permitted in apps and (ii) Apple’s most-favored customer clause preventing discounting on other platforms. Let’s examine each in turn.

In my earlier post, I emphasized that a potential plaintiff would have a difficult time demonstrating that Apple has monopoly power in any relevant market for the purposes of antitrust analysis.  Both exclusivity arrangements and most-favored customer clauses can generate efficiencies and improve consumer outcomes; they pose little threat to competition and consumers in the absence of durable monopoly power.  I suggested that this was the largest obstacle to any antitrust analysis involving Apple’s subscription model:

The most often discussed bar to an antitrust action against Apple is the one many regulators simply assume into existence: Apple must have market power in an antitrust-relevant market.  While Apple’s share of the smartphone market is only 16% or so, its share of the tablet computing market is much larger.  The WSJ, for example, reports that Apple accounts for about three-fourths of tablet computer sales.  I’ve noted before in the smartphone context that this requirement should not be consider a bar to FTC suit, given the availability of Section 5; however, as the WSJ explains, market definition must be a critical issue in any Apple investigation or lawsuit:

Publishers, for example, might claim that Apple dominates the market for consumer tablet computers and that it has allegedly used that commanding position to restrict competition. Apple, in turn, might define the market to include all digital and print media, and counter that any publisher not happy with Apple’s terms is free to still reach its customers through many other print and digital outlets.

One must conduct a proper, empirically-grounded analysis of the relevant data to speak with confidence; however, it suffices to say that I am skeptical that tablet sales would constitute a relevant market.

Gans agrees, also suggesting that lack of monopoly power undercuts any potential antitrust case against Apple.

Exclusivity can be an issue as it might harm other platforms that might want to sell digital subscriptions. If Apple’s exclusivity means that those platforms cannot generate sales, then a monopoly platform may arise or be sustained. But that is the issue here: where is Apple’s monopoly? It is arguable that Apple has a monopoly over tablet devices and has had that monopoly now for almost 11 months since it first released its iPad. But if a publisher decided not to sell subscriptions for iPad users, it would have other options: particularly the options it had prior to April 2010; web based subscriptions and eReader subscriptions, not to mention physical subscriptions that fall outside of Apple’s terms. It would have to be demonstrated that the iPad was one of the few or the only way to access a particular customer class to believe that publishers were excluded by Apple’s terms. In any case, those terms are not strictly exclusionary as they do not prevent other digital subscription sales – even for iPad access. Instead, they at worst, raise the costs of those other sales. To be sure, raising costs can sometimes be an antitrust violation but the degree of market power a firm would have to possess to make that the case has to be proportionate. Right now, that case appears weak.

Most-favored customer clauses arise when the terms of one supply contract impose conditions on other contracts a party might enter into. Apple is effectively preventing discounting elsewhere. If it did not do this, then that discounting would occur and Apple may be unable to generate as much in sales. Worse than that, Apple may do the hard work of signing consumers up for initial subscriptions only to have those same consumers contacted outside of those arrangements with discounts.

But such clauses can have the effect of raising prices in the market and this is what might concern antitrust authorities. For this to be likely to occur here, Apple must have a requisite degree of power (so that publishers are forced to accept those terms) and it must be the case that prices actually rise. It is too early to tell but if Apple is right and iPad consumers really do purchase more, then it is possible that the price elasticity of demand from iPad consumers is relatively high; that is, charge $10 to an iPad consumer and you generate many more sales than $10 charged for other types of consumers. In this environment, it is not obvious that the iPad will lead to higher digital subscription prices.

My only quibble with Gans’ post is that he appears to describe the “monopoly power” requirement as a problem for antitrust, rather than a sensible requirement that protects consumers from overdeterrence.  For example, Gans writes that “antitrust law, as it currently stands, has difficulty in dealing with industries whereby the path is towards monopoly and how to act prospectively about it.”   Gans does not suggest that the antitrust authorities should bring a case against Apple on these grounds.   But he does seem to imply that antitrust would be more effective if it were more willing to reach business conduct that is not harming consumers, may well be providing significant efficiencies currently, but might generate future harm.   I’m not sure this is what he means or if I’m misinterpreting.  If I’m right, I would have characterized things quite differently, perhaps along the lines of “antitrust law is not willing to sacrifice current gains to consumers for the sake of prohibiting practices that are not currently harming competition and the basis for predicting future harm is speculative, at best.”

Potential minor quibble aside, its a very good post and well worth reading.

Filed under: antitrust, economics, MFNs, monopolization, technology

Antitrust investigators continue to see smoke rising around Apple and the App Store.  From the WSJ:

For starters, subscriptions must be sold through Apple’s App Store. For instance, a magazine that wants to publish its content on an iPad cannot include a link in an iPad app that would direct readers to buy subscriptions through the magazine’s website. Apple earns a 30% share of any subscription sold through its App Store. …

A federal official confirmed to The Washington Post that the government is looking at Apple’s subscription service terms for potential antitrust issues but said there is no formal investigation. Speaking on the condition of anonymity because he was not authorized to comment publicly, the official said that the government routinely tracks new commercial initiatives influencing markets.

Investigators certainly suspect Apple of myriad antitrust violations; there is even some absurd talk about breaking up Apple.  There is definitely smoke — but is there fire?

The most often discussed bar to an antitrust action against Apple is the one many regulators simply assume into existence: Apple must have market power in an antitrust-relevant market.  While Apple’s share of the smartphone market is only 16% or so, its share of the tablet computing market is much larger.  The WSJ, for example, reports that Apple accounts for about three-fourths of tablet computer sales.  I’ve noted before in the smartphone context that this requirement should not be consider a bar to FTC suit, given the availability of Section 5; however, as the WSJ explains, market definition must be a critical issue in any Apple investigation or lawsuit:

Publishers, for example, might claim that Apple dominates the market for consumer tablet computers and that it has allegedly used that commanding position to restrict competition. Apple, in turn, might define the market to include all digital and print media, and counter that any publisher not happy with Apple’s terms is free to still reach its customers through many other print and digital outlets.

One must conduct a proper, empirically-grounded analysis of the relevant data to speak with confidence; however, it suffices to say that I am skeptical that tablet sales would constitute a relevant market.

Meanwhile, Google demonstrates the corrective dynamics of markets.  New entry during an investigation period can influence agencies’ decision-making — as it should; Google has recently offered a new service, OnePass, which would allow publishers to keep up to 90% of subscription revenue.  It is unknown — and perhaps unknowable — which business model is “correct;” perhaps both are preferable in their individual contexts.  It appears there is emerging, significant competition in this space, of which regulators should take note.

Finally, in light of Geoff’s recent post, it is also worth discussing whether Tim Wu’s recent appointment to the Commission impacts the likelihood of a suit against Apple.  Geoff thinks it means a likely suit against Google; Professor Wu might bring similar implications for Apple — after all, Professor Wu has described Apple as the company he most fears.  I have no doubt that Professor Wu will spend a good deal of his time at the Commission dealing with issues surrounding both Google and Apple, policy issues concerning both, and potential antitrust theories surrounding business practices such as Apple’s subscription model.  I am skeptical, however, that his presence changes the actual likelihood of a suit: Section 2 law remains a substantial obstacle.  The real value of his creative thinking will be in generating Section 5 claims surrounding these business arrangements — where the Commission must demonstrate substantially less onerous requirements and where the Commission operates within greater legal ambiguities.  In this light, will Professor Wu bring such an aggressive stance to Section 5 so as to make the difference between an Apple challenge or not?  I doubt it — the Commission has already expressed an interpretation of Section 5 that I find unjustifiably aggressive.  The Commission needs no assistance in leveraging Section 5 to intervene in high-tech contexts: just ask Intel.

Predictions are a rough business: that caveat aside, I continue to believe the FTC will file against Apple — and because of the obvious (and likely impassable) hurdles under Section 2, I believe the eventual complaint will be a bare Section 5 suit.

Filed under: antitrust, economics, federal trade commission, monopolization, regulation, technology

Along with co-author Judd Stone, I’ve posted to SSRN our contribution to the Review of Industrial Organization‘s symposium on the 2010 Horizontal Merger Guidelines — The Sound of One Hand Clapping: The 2010 Horizontal Merger Guidelines and the Challenge of Judicial Adoption.

The paper focuses on the Guidelines’ efficiencies analysis.  We argue that while the 2010 HMGs “update” the Guidelines’ analytical approach in generally desirable ways, these updates are largely asymmetrical in nature: while the new Guidelines update economic thinking on one “side” of the ledger (changes that make the plaintiff’s prima facie burden easier to satisfy, ceteris paribus), they do not do so with respect to efficiencies analysis on the other side of the ledger.  These asymmetrical changes thereby undermine the new Guidelines’ institutional credibility.

In particular, we focus on the Guidelines’ treatment of so-called “out-of-market” efficiencies as well as fixed cost savings.  In both cases we argue that updates were appropriate and consistent with the Agencies’ expressed preference to more accurately reflect economic thinking and shift from proxies to direct assessment of competitive effects.   If anything, the Guidelines appear to be more skeptical of efficiencies arguments than the previous version, adding “the Agencies are mindful that the antitrust laws give competition, not internal operational efficiency, primacy in protecting customers.”  We then turn to discussing the implications of this “asymmetrical update” for judicial adoption of the Guidelines.  Some have discussed the possibility that these Guidelines will be less successful with federal courts because they downplay market definition.  As I’ve said here many times, I do not think the Agencies (if out of nothing but self-interest) will avoid market definition.  However, we argue that the asymmetrical updating problem is a more serious one, and that widespread and wholesale adoption of the HMGs should not be taken for granted.

Here is the abstract:

There is ample justification for the consensus view that the Horizontal Merger Guidelines have proven one of antitrust law’s great successes in the grounding of antitrust doctrine within economic learning. The foundation of the Guidelines’ success has been its widespread adoption by federal courts, which have embraced its rigorous underlying economic logic and analytical approach to merger analysis under the Clayton Act. While some have suggested that the Guidelines’ most recent iteration might jeopardize this record of judicial adoption by downplaying the role of market definition and updating its unilateral effects analysis, we believe these updates are generally beneficial and include long-overdue shifts away from antiquated structural presumptions in favor of analyzing competitive effects directly where possible. However, this article explores a different reason to be concerned that the 2010 Guidelines may not enjoy widespread judicial adoption: the 2010 Guidelines asymmetrically update economic insights underlying merger analysis. While the 2010 Guidelines’ updated economic thinking on market definition and unilateral effects will likely render the prima facie burden facing plaintiffs easier to satisfy in merger analysis moving forward, and thus have significant practical impact, the Guidelines do not correspondingly update efficiencies analysis, leaving it as largely as it first appeared 13 years earlier. We discuss two well-qualified candidates for “economic updates” of efficiencies analysis under the Guidelines: (1) out-of-market efficiencies and (2) fixed cost savings. We conclude with some thoughts about the implications of the asymmetric updates for judicial adoption of the 2010 Guidelines.

Download and read the whole thing.

Filed under: antitrust, business, economics, legal scholarship, merger guidelines, mergers & acquisitions, scholarship

The titular question is posed by Louis Kaplow (Harvard) in a recent piece in the Harvard Law Review that I suspect will attract a fair amount of attention.   I may have more to say about this later, but for now, here is the abstract:

Competition law is dominated by the market definition / market share paradigm, under which a relevant market is defined and pertinent market shares therein are examined in order to make inferences about market power. This Article advances the immodest claim that the market definition process is incoherent as a matter of basic economic principles and hence should be abandoned entirely. This conclusion rests on four arguments. First, meaningful inferences of market power in redefined markets cannot be made. Second, the paradigm relies on an unarticulated notion of a standard reference market whose necessity and prior omission signal a serious gap. Third and most important, determining what market definition is best is impossible without first formulating a best estimate of market power, rendering further analysis pointless and possibly leading to erroneous outcomes. Finally, the need to define markets engenders a mistaken focus on cross-elasticities of demand for particular substitutes rather than on the market elasticity of demand, which further reduces the quality of resulting market power inferences. Although the inquiry is conceptual, brief remarks on legal doctrine suggest that creating conformity may not be unduly difficult.

Check out the whole thing.

The “consumer choice” approach to antitrust is increasingly discussed in a variety of settings, and endorsed by regulators and in scholarship, especially but not exclusively in the Section 5 context.  The fundamental idea is that the “conventional” efficiency approach embedded in the total and/or consumer welfare standards is too cramped and does not measure the “right” things. The consumer choice is a standard focusing on the options available to consumers and is proposed as an alternative to efficiency-based standards.  Preliminary, I do not think the approach as I understand it is an improvement for modern antitrust methods, nor do I think that its adoption would be a good development for the coherence of antitrust jurisprudence or consumers.

Read the full piece here.

Steven Pearlstein at the Washington Post asks if it’s “Time to loosen Google’s grip.”  The article is an analytical mess.  Pearlstein is often a decent business reporter–I’m not sure what went wrong here, but this is a pretty shoddy piece of antitrust journalism.

Read the full piece here. 

A federal district court judge recently decided an interesting antitrust/ IP case involving “wheel game” slot machines.  IGT sued Bally’s in 2004 for allegedly infringing a number of patents on a “wheel game” slot machine.  Bally’s initially prevailed, winning a pair of summary judgment rulings on the validity of IGT’s patents and refusing to grant summary judgment on Bally’s antitrust counterclaims.

Read the full piece here. 

We’ve been reading with interest a bit of an blog squabble between Tim Wu and Adam Thierer ( see here and here) set off by Professor Wu’s WSJ column: “In the Grip of the New Monopolists.”  Wu’s column makes some remarkable claims, and, like Adam, we find it extremely troubling.

Read the full piece here.

Carl Shapiro’s (DOJ) speech at the ABA Fall Forum contains (at least) two interesting tidbits worth highlighting for TOTM readers.  The first is a discussion of the DOJ’s case against Blue Cross Blue Shield, which as discussed here, turns on an economic analysis of the use of most-favored nations clauses in contractual arrangements with hospitals…

Read the full piece here.